April 24 (Bloomberg) -- Citigroup Inc., the bank that took
the most U.S. aid during the credit crisis, said it’s better-prepared than some rivals to withstand the impact of new anti-bailout rules that could force lenders to sell more debt.

Citigroup’s so-called bail-in plan -- a rescue that makes
debt investors and stockholders absorb losses instead of
taxpayers -- shows the bank already has issued more long-term
debt than some of its largest rivals, Treasurer Eric Aboaf said
during an April 22 investor presentation. That leaves the New
York-based bank in a better position as regulators decide how
much more debt lenders should add to their buffers, Aboaf said.

The U.S. is designing ways to wind down failing banks
without unpopular measures such as the publicly funded $700
billion Troubled Asset Relief Program. The 2010 Dodd-Frank Act
gives regulators tools to dismantle a large, distressed firm,
and the Federal Reserve and Federal Deposit Insurance Corp. are
considering whether banks should be told to issue long-term debt
now that could be converted to equity in an emergency.

The idea, part of the so-called orderly liquidation
authority or OLA, has ruffled fixed-income investors. They’re
concerned that prices of existing bonds will fall and funding
costs will rise if banks are forced to issue more debt, with
senior bondholders used as “the new honeypot” to protect
taxpayers, according to a December report by UBS AG analysts led
by Robert Smalley.

Citigroup Adapts

“Based on what we know now, we believe that our capital
structure positions us well to adapt to potential OLA
requirements, especially relative to our peer institutions, many
of whom tend to run with less long-term parent-company debt than
we do,” Aboaf said. Citigroup ranks third by assets among U.S.
based lenders.

Citigroup’s “bail-in components” that could be used in a
potential failure included $235 billion of different kinds of
debt, according to an accompanying slide show. The bank had
$1.69 trillion of total liabilities at the end of March,
according to a financial supplement.

The lender received $45 billion of U.S. bailout funds plus
asset guarantees during the financial crisis. The money has
since been repaid and Citigroup earned $7.54 billion last year.

JPMorgan Chase & Co., the biggest U.S. bank, has $373
billion of holding company debt and equity, according to a
February slide show from the New York-based company. Bank of
America Corp., the second-biggest U.S. bank, has yet to make a
similar disclosure, Jerome Dubrowski, a spokesman for the firm,
said in an e-mail. Wells Fargo & Co., the fourth-biggest, also
hasn’t made such a disclosure, Mary Eshet, a spokeswoman for the
company, said in an e-mail.

Debt Floor

Fed Governor Jerome “Jay” Powell said last month that the
central bank and FDIC are “considering the pros and cons” of
setting a floor for long-term unsecured debt to absorb losses
and capitalize a bridge holding company for banks that fail.

“The idea of a minimum amount of holding company debt has
legs within the regulatory community, and we’ll probably see
something coming out of the Fed by the end of the year,” said
Smalley, the UBS analyst, in a phone interview. “They want as
many buffers as they can get.”

Bail-ins have drawn favor in the U.S. and Europe after
taxpayers were forced to bear the risk of bailing out firms such
as American International Group Inc. and Royal Bank of Scotland
Group Plc while senior bondholders weren’t asked to take losses.
Bail-ins have been used in Cyprus, Denmark and Ireland.

Irish Impact

Irish banks, which received a gross 64 billion-euro
taxpayer bailout over the past four years, inflicted about 15
billion euros of losses on subordinated bondholders, even as
senior creditors and depositors were made whole following
western Europe’s biggest banking crisis.

Denmark is reviewing its commitment to the idea after the
2011 failure of Amagerbanken A/S, which was the first EU bank
collapse to trigger senior creditor losses within a state
resolution framework. The move tainted Denmark’s entire
financial industry, with funding costs jumping even for Danske
Bank A/S, the nation’s biggest lender.

In the U.S., Fed Governor Daniel Tarullo has said he wants
a minimum long-term debt requirement to prevent further bailouts
and counteract the moral hazard that they present. This method
“would not seem to carry significant hurdles,” he said in
December.

The biggest Wall Street firms sold fewer bonds in the wake
of the financial crisis as they sought to reduce their
borrowings, according to Smalley. This diminished supply has
helped to increase the value of the securities, Smalley said.

Prices Rise

Bonds from JPMorgan rose an average 4.2 percent in the last
12 months, according to Bank of America Merrill Lynch’s U.S.
Financial Index, while Citigroup’s bonds have gained an average
7.4 percent. The index has climbed an average 6 percent.

Bondholders are “nervous” because the value of their
investments could decline if banks are forced to issue billions
of dollars of new debt to comply with the rules, according to
David Knutson, a credit analyst with Legal & General Investment
Management America Inc.

“The debt markets are clamoring for more information
around potential supply due to OLA,” said Knutson. “If the
supply characteristics significantly increase, the price is
going to go down.”

A bill intended to end the perception that some U.S. banks
are too big to fail is scheduled to be introduced today in the
Senate. Under the measure by Senators Sherrod Brown, an Ohio
Democrat, and David Vitter, a Louisiana Republican, banks with
more than $500 billion in assets would face higher capital
standards meant to reduce risk and end any market perception
that taxpayers will bail out the biggest institutions.